Retired Money: Equities in Retirement — you may need more than you think

Contrary to what some may feel, equities in retirement is not an oxymoron. If you’re retired or almost so, you may be thinking it’s time to lighten up on your equity exposure.

The problem with rules of thumb is that some of them get quite dated and nowhere is this more relevant than in the maxim that a retiree’s fixed income exposure should equal their age. (So, the guideline goes, 60 year olds would be 40% in stocks and 90 year olds only 10% in them).

My latest MoneySense Retired Money column looks at this in some depth, via reviews of two books that tackle both the looming North American retirement crisis and this topic of how much equity retiree portfolios should hold. You can find the full article by clicking at the highlighted text: How to Boost Your Returns in Retirement.

As the piece notes, the single biggest fear retirees face is the prospect of outliving your money. Unfortunately, retiring in this second decade of the 21st century poses challenges for just about any healthy person who lacks an inflation-indexed employer-sponsored Defined Benefit (DB) pension plan. We’re living longer and interest rates are still mired near historic lows after nine long years.

The two books surveyed are Falling Short, by Charles Ellis, and Chris Cook’s Slash Your Retirement Risk. I might add that regular Hub contributor Adrian Mastracci twigged me to the Ellis book when he compared and contrasted it to my own co-authored book, Victory Lap Retirement. See Adrian’s review here: Two notable books to guide your “Retirement” journey. Continue Reading…

Why are boomers slow to embrace DIY online investing?

My latest Financial Post column has just been published, which you can retrieve  by clicking on the highlighted headline: Boomers slow to embrace online investing but, surprise, it’s not a technology thing.

(Added Thursday: The article has also been published in the print edition of Thursday’s paper, on page FP8, under the headline Boomers ‘fearful’ of online investing: advisor. This Hub version of the column elaborates on a few points, adding the important distinction that newer online do-it-yourself [DIY] investors do NOT have to go without human advice or guidance, which they can get through fee-for-service planners, fee-only money coaches or investment coaches.)

According to a TD Bank Group survey titled Too shy to DIY, 79% of Canadian baby boomers use the Internet for banking but only a paltry 16% are DIY online investors.  The poll of 2,000 Canadian adults was conducted late in July.

Since the Boomers have embraced most aspects of the Internet and are just as addicted to smartphones as Millennials and Generation X, it’s clear (as the headline notes) that “it’s not a technology thing.”

Rather, the main reason for low Boomer use of online investing is lack of investment knowledge: TD says 79% of those surveyed don’t manage their money online because they simply don’t know enough about investing, while 22% say they don’t have enough time to invest on their own.

When I asked Jeff Beck, Associate Vice President at TD Direct Investing, why the disparity he replied with this email:

“The gap between Boomers who bank online and those who invest online can be attributed to the fact that many say they are unfamiliar or uncomfortable with online investing tools. There’s a misperception that online investing is a complicated, time-consuming activity. That’s why TD Direct Investing offers a range of educational resources, tools and support to help investors get off to a great start, whether their goal is active trading, long-term investing, or both.”

So too do the other major discount brokerages as far as I’m aware: TD is one of the discount brokerages our family uses and there’s certainly no dearth of information on investing there or indeed most other major financial institutions.

As a boomer myself I was a tad surprised by the findings. Continue Reading…

Loss avoidance: The power of long-term thinking

By John WIlson

Special to the Financial Independence Hub

A friend of mine was planning a long trip outside of Canada and didn’t really have a definite date as to when he’d be back. He was thinking a good six months to a year. I remember asking him about what he would do with his car; where he planned to park it. He thought it would cost too much to put it in long-term parking, somewhere around $200 to $300 a month. He was, as he saw it, just going to park it on the street.

You may detect where this story is heading.

A few months into the trip his car was impounded. As he wasn’t back in the country yet, he asked me if I could go to the lot on his behalf. About $2,500 in fees and several (not so enjoyable) hours later, his car was finally retrieved.

By choosing not to pay long-term parking up front, my friend may have enjoyed the short-term benefit of not having to put effort into making arrangements or paying any money. But the inherent risk in that decision played out; the car ended up in the impound lot and he had to pay quite a significant amount of money: not to mention the embarrassment of asking a friend to go for a long, impromptu visit to the lot on his behalf.

Short-term gratification can hurt in the long run

This story reminds me of how some of the highest-return investments in life are investments of time, where the payoff comes from the avoidance of loss.

We often see the tradeoff between short-term and long-term thinking in our interactions with management teams. For example, a company can really inflate its current earnings and make the latest report or annual release look a lot better by under-investing in intangibles, such as marketing.

Marketing is an expense that will hit the income statement every quarter, but often doesn’t provide a benefit until two, three, four or ten years down the road. The same thing goes with investments in R&D. The management team that focuses too much on optimizing current period earnings will often do so to the detriment of future profitability and competitive positioning. This is one of the reasons we encourage managers to adopt incentive plans that are based on long-term performance rather than short-term earnings targets or share price movements.

Continue Reading…

Contrasting opportunities in Emerging Markets: FX, Equities and Bonds

By Bradley Krom, WisdomTree Investments

Special to the Financial Independence Hub

Year-to-date, more than US$32 billion has flowed in to emerging market (EM) exchange-traded funds (ETFs) in the U.S.1 As a consequence, EM equities, bonds and foreign exchange (FX) markets are outperforming most developed markets by a sizable margin. Despite a proliferation of choices over the last several years, WisdomTree continues to advocate a multiasset approach to EM. Below, we contrast the various risks and drivers of return for EM FX, equities and the fixed income market.2

How much risk (Volatility)?

One of the more puzzling issues for global investors is the general lack of volatility across major asset classes. Emerging markets are no exception. As the chart below shows,  returns have been strong and volatility has generally been declining, similar to other markets. In the case of EM equities, volatility has fallen to levels not seen since 2007.

Rolling 12-Month Volatility (%)

While we are not in the camp that says low volatility implies that a market correction is imminent, it is notable that EM equity volatility has dipped below EM local debt over the last 12 months. This is attributable to several factors, most notably the underlying currency exposure difference between the equity index and bond index.

Equities: More In Asia with lower FX volatility, Fixed Income more in Latin America with higher FX volatility

Due to underlying macro conditions, currencies in Asia tend to be less volatile than currencies in Latin America. EM equities have over 72% of their exposure in EM Asia compared to the EM local debt,3 which only has a 23% weight.4 Therefore, even though the underlying asset of equities may be higher than bonds, the overall exposures may not always tell the same story.

The last time volatility converged in this way was 2013 during the “taper tantrum.” For the 12 months ending June 30, 2013, returns between EM local debt and EM equities were similar (1.32% versus 2.87%). However, in the next 12 months ending June 30, 2014, EM equities outperformed EM local debt by over 1,000 basis points while maintaining comparable volatility. With volatility particularly difficult to forecast, we would continue to advocate EM equity risk over rate risk in the low-volatility, low-interest rate environment.

Drivers of Return

Continue Reading…

The many benefits of ETFs: What’s not to love about them?

The availability of exchange-traded funds (ETFs) is one of the best things to happen to investors in the last twenty years. What’s not to love about ETFs?

Investors can get broad diversification on the cheap with just two or three funds. This simplicity is what tipped the scales for me nearly three years ago when I switched from a portfolio of 25 Canadian dividend stocks to my two-ETF solution (the four-minute portfolio).

But not all Canadian investors are as enamoured as I am with ETFs. While Canadian ETF assets climbed to a record $133.8 billion in assets under management (Canadian ETF Association – Aug 31 2017), the Canadian mutual fund industry claims a whopping $1.41 trillion in assets (Investment Funds Institute of Canada – Aug 31 3017).

That 10:1 ratio needs to change in a hurry, but there are still headwinds facing the average investor.

First of all, mutual funds have been around a lot longer than ETFs and their sales channels are more widely available. In plain language that means any Joe or Jane investor can go to an advisor and choose from a menu of in-house mutual funds, whereas if an investor wanted to build a portfolio of ETFs, his or her advisor might not have the right license to sell them, might not have access to an exchange to trade them, or might simply balk at the idea that a couple of low cost ETFs could outperform an actively managed portfolio of mutual funds.

Many investors are forced to go the do-it-yourself route like I did, learning on the fly from financial blogs, forums, and sometimes even the financial media about the benefits of investing in low cost ETFs.

 Benefits of low-cost ETFs

Despite these challenges, Pat Chiefalo, the new head of iShares Canada, sees a bright future for the ETF industry in Canada as investors seek lower price points and broader exposure to different markets.

“ETFs offer a simpler and cleaner approach to building a diversified portfolio and we see that diversification makes up the vast majority of investment returns,” said Chiefalo.

Indeed, fans of this blog and of the Canadian Couch Potato’s model portfolios will recognize products like iShares Core MSCI All Country World ex Canada Index ETF: also known as XAW. This ETF gives investors one-stop-shop access to U.S., international, and emerging markets — nearly 8,000 holdings in total — for just 22 basis points (0.22% MER).

It’s hard to believe a company can make money charging $22 for every $10,000 invested, but you won’t hear Canadian investors complain. That’s because a similar global mutual fund might cost $220 for every $10,000 invested (there’s that 10:1 ratio again).

How low will ETF costs go? Continue Reading…